A Former SEC Attorney Telling Tales

Friday, February 6, 2009
A HISTORY LESSON
âGeneral affairs here are about as bad as they can be.â

-J.P. âJackâ Morgan, Jr.
August 8, 1907

â[R]egulatory bodies, like the people who comprise them, have a marked life cycle. In youth they are vigorous, aggressive, evangelistic, and even intolerant. Later they mellow, and in old age-after a matter or ten or fifteen years-they become, with some exceptions, either an arm of the industry they are regulating or senile.â

-John Kenneth Galbraith
The Great Crash 1929 (1954)

Most congressional hearings are tedious and boring. Television stations brave enough to broadcast these hearings are often meagerly rewarded with an audience of insomniacs. Sometimes, a hearing becomes controversial when the witness is unable to answer the senators questions. Sometimes, witnesses are caught in lies. This all happened Wednesday. The Wall Street Journal headline for February 5 reads âAt Madoff Hearing, Lawmakers Lay Into SEC.â

On February 4, 2008, we saw fireworks as the House Committee on Financial Services grilled the SEC over its recent regulatory failures. This was not the first time in the last year or two that such a grilling occurred. Prior hearings were not limited to giant ponzi schemes - some dealt with a little understood scheme â predatory short selling. The SEC is being asked today why the stock market has collapsed and how the lack of federal regulation enabled financial firms and money mangers to secretly operate in very risky and perhaps unethical ways. Often a look at history is useful in understanding modern behaviour.

I recently read two delightful books about our capital markets. The first was published in 2007 called The Panic of 1907 by Robert F. Bruener and Sean D. Carr, and the second is the book by John Kenneth Galbraith, the well-known American Canadian economist called Stock Market Crash of 1929 published in 1954. As I review the events leading up to the Financial Crisis of 1907 and the Stock Market Crash of 1929, I am fascinated to see certain patterns emerge. It seems that opaque âstock poolsâ were involved in both market events as well as complex schemes to game the markets, using misinformation, and individual conduct that was illegal and perhaps unethical. Specifically both market events involved unbridled, abusive short selling by opaque entities.

If this guy is blaming short selling and the disappearance of the up-tick rule for the market decline then he is as clueless about the market as the housewives that watch FOX news.

Everybody is happy as long as the market is going up, but once it takes a dip its like a witch-hunt for short sellers. Please stop propagating this crap, the earth is not flat and and shorting didn't cause the bear market. Most likely it was a LACK of enough short sellers that caused the frivolous run-up in the markets in the first place.

Neo, you seem to be pretty clueless with respect to your accusations. Baker was addressing this subject back at a time when the markets were advancing. The fact that they have now declined have nothing to do with it.

Neo, you seem to be pretty clueless with respect to your accusations. Baker was addressing this subject back at a time when the markets were advancing. The fact that they have now declined have nothing to do with it.

More...

He may have addressed it before the market decline, however there is a pervasive trend in the media of blaming short sellers for the fall in the markets. His analogies serve to perpetuate false beliefs that falls in prices are caused by evil short selling hedge funds.

In the blog he states that: From June through September 1907, the stock market experienced a sharp decline in stock prices. This sharp decline is attributable to âstock poolsâ with no transparancy, massive short-selling and âbear raids.Arguably, the âstock poolsâ of the past are the hedge funds of today. Predatory short selling has destroyed many companies who may or may not have deserved the chance to thrive. Still, it seemed nobody was paying attention. Only after bear raids, massive short selling and its counterpart rumor-mongoring, did the Government take notice. The financial markets have deteriorated through a combination of poor incentives, lax oversight and a âwhack-a-mole type of response from our watchdogs.

Did naked short selling occur? Of course it did, but it was never such a pervasive problem that it can be linked to major market declines, which is the impression I get when I read the blog.

Odd. Deepcapture is filled w/data that proves conclusively that not only is naked shorting a huge problem, but that financials were continually shorted even with the SEC ban. How could that happen w/o illegalities? How could reg sho have a list from Jan 05 until recently with 300 names on it? Why did John Mack come out publically and lament what overstock is suing his firm for?

Aguirre has said he was fired when he addressed Naked Short Selling. That's how prevalent it was/is.